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Monday, Feb. 6, 2012


Less respect for credit rating agencies

Italian investigative authorities have started investigating credit rating agencies on suspicion of manipulating markets by issuing ratings without a solid basis. The investigation appears to be retaliatory action for the agencies' downgrading of bonds of European countries.

It is reported that a search warrant in one of the cases stated that a downgrading of Italy's sovereign rating was based on "untruthful, tendentious, incoherent and unfair" assessments and data.

European government officials are critical of credit rating agencies because they think that they are too quick to downgrade the bonds of European Union member countries and are thus functioning as a guide for speculative funds. Unless something is done to rectify the current situation, the world economic system could face a serious breakdown.

Credit rating agencies study the financial statements and the governance of firms and governments that issue debentures or bonds, and rate their ability to pay back their debts. Credit rating agencies also raise alarms when a crisis in a market appears likely to occur. Investors take the information generated by credit rating agencies into consideration when making their decisions.

These days, however, the activities of credit rating agencies are raising suspicions in Italy and other countries. When Standard & Poor's downgraded the United States' triple-A rating in August, it was criticized for overestimating the U.S. debtload. Credit rating agencies also awarded Enron and WorldCom corporations their highest ratings until just before their collapse in the early 2000s due to their window-dressing settlements of accounts.

Credit rating agencies were not initially responsible for the European sovereign debts crises. For example, it was Greece's hiding of its debts at the time it applied to join the eurozone that led to the crisis. The problem is that each time a rating agency downgrades a country, short-term speculative funds cause a disturbance in markets.

The Italian authorities doubt that the ratings of credit rating agencies are accurate. At the very least, credit rating agencies should disclose the basis for their rating. To help check moves by speculative funds, world leaders should consider imposing a tax on financial transactions.

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